nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2022‒09‒05
eighteen papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Labor Market Shocks and Monetary Policy By Serdar Birinci; Fatih Karahan; Yusuf Mercan; Kurt See
  2. Short-Time Work and Precautionary Savings By Thomas Dengler; Britta Gehrke
  3. Estimation Bayésienne d’un modèle DSGE des effets de la politique budgétaire sur l’économie camerounaise By ngah ntiga, louis henri
  4. The Labor Earnings Gap, Heterogeneous Wage Phillips Curves, and Monetary Policy By Mario Giarda
  5. Macroeconomic Effects of Dividend Taxation with Investment Credit Limits By Matteo Ghilardi; Roy Zilberman
  6. Pandemic Preference Shocks and Inflation in a New Keynesian Model By William Craighead
  7. Aggregate Properties of Open Economy Models with Expanding Varieties By Saroj Bhattarai; Konstantin Kucheryavyy
  8. FTPL and the Maturity Structure of Government Debt in the New Keynesian Model By Max Ole Liemen; Olaf Posch
  9. Capital flows and monetary policy trade-offs in emerging market economies By Paolo Cavallino; Boris Hofmann
  10. Optimal deficit‑spending in a liquidity trap with long‑term government debt By Charles de Beauffort
  11. Monetary Policy Under Labor Market Power By Miss Anke Weber; Rui Mano; Mr. Yannick Timmer; Anastasia Burya
  12. Quarterly Projection Model for Vietnam: A Hybrid Approach for Monetary Policy Implementation By Mr. Natan P. Epstein; Lucyna Gornicka; Karel Musil; Valeriu Nalban; Nga Ha
  13. Inequality, Nominal Rigidities, and Aggregate Demand By Sebastian Diz; Mario Giarda; Damián Romero
  14. Commodity price shocks, factor utilization, and productivity dynamics By Gustavo González
  15. International Sovereign Spread Differences and the Poverty of Nations By Farzana Alamgir; Alok Johri
  16. The End of Privilege: A Reexamination of the Net Foreign Asset Position of the United States By Andrew Atkeson; Jonathan Heathcote; Fabrizio Perri
  17. Fear of Appreciation and Current Account Adjustment By Paul Bergin; Kyunghun Kim; Ju H. Pyun
  18. The Distributional Impact of the Minimum Wage in the Short and Long Run By Erik Hurst; Patrick J. Kehoe; Elena Pastorino; Thomas Winberry

  1. By: Serdar Birinci; Fatih Karahan; Yusuf Mercan; Kurt See
    Abstract: We develop a heterogeneous-agent New Keynesian model featuring a frictional labor market with on-the-job search to quantitatively study the role of worker flows in inflation dynamics and monetary policy. Motivated by our empirical finding that the historical negative correlation between the unemployment rate and the employer-to-employer (EE) transition rate up to the Great Recession disappeared during the recovery, we use the model to quantify the effect of EE transitions on inflation in this period. We find that the four-quarter inflation rate would have been 0.6 percentage points higher between 2016 and 2019 if the EE rate increased commensurately with the decline in unemployment. We then decompose the channels through which a change in EE transitions affects inflation. We show that an increase in the EE rate leads to an increase in the real marginal cost, but the direct effect is partially mitigated by the equilibrium decline in market tightness through aggregate demand that exerts downward pressure on the marginal cost. Finally, we study the normative implications of job mobility for monetary policy responding to inflation and labor market variables according to a Taylor rule, and find that the welfare cost of ignoring the EE rate in setting the nominal interest rate is 0.2 percent in additional lifetime consumption.
    Keywords: job mobility; monetary policy; Heterogeneous-agent New Keynesian (HANK) model; job search
    JEL: E12 E24 E52 J31 J62 J64
    Date: 2022–08
  2. By: Thomas Dengler; Britta Gehrke
    Abstract: In the Covid-19 crisis, most OECD countries have used short-time work (subsidized working time reductions) to preserve employment relationships. This paper studies whether short-time work can save jobs through stabilizing aggregate demand in recessions. First, we show that the consumption risk of short-time work is considerably smaller compared to unemployment using household survey data from Germany. Second, we build a New Keynesian model with incomplete asset markets and labor market frictions featuring an endogenous firing and short-time work decision. In recessions, short-time work reduces the unemployment risk of workers, which mitigates their precautionary savings motive. Using a quantitative model analysis, we show that this channel increases the stabilization potential of short-time work over the business cycle.
    Keywords: short-time work, fiscal policy, incomplete asset markets, unemployment risk, matching frictions
    JEL: E21 E24 E32 E52 E62 J63
    Date: 2022
  3. By: ngah ntiga, louis henri
    Abstract: This study sheds light on the effects of fiscal policy on economic activity in Cameroon while focusing on shocks and fluctuations in the economic cycle. For this we use a DSGE model using Bayesian estimation on quarterly data covering the period 1995q2 - 2020q1. The data comes from various sources including the Bank World, the National Institute of Statistics and the Table of State Financial Operations. The results show that GDP, public expenditure and consumption are mainly explained by public investment and consumption tax. Also, a decrease in Consumption tax induces an increase in GDP and household consumption. However, a restrictive monetary policy does not stimulate consumption and private investment. Finally, reducing taxes on capital means increasing production, consumption and public investment. One of the measures that the public authorities could consider, especially in this period of crisis, is the continuous increase in investments public utilities, some reduction in consumption tax and capital taxes for boost the Cameroonian economy.
    Keywords: fiscal policy; DSGE model; Bayesian estimation
    JEL: C1 E62
    Date: 2022–08
  4. By: Mario Giarda
    Abstract: We study the role of household heterogeneity in skills over the business cycle in the U.S. We document that the ratio of labor income of skilled to unskilled workers (the earnings gap) is coun-tercyclical and increases in response to contractionary monetary policy. This result is due to the higher rigidity in unskilled workers’ wages and gross substitution between skills in production. We find that in a calibrated New Keynesian model, when the earnings gap is countercyclical and un-skilled workers are more financially constrained, the impact of monetary policy shocks can be twice as strong as with homogeneous wage rigidities.
    Date: 2021–12
  5. By: Matteo Ghilardi; Roy Zilberman
    Abstract: We analyze the effects of dividend taxation in a general equilibrium business cycle model with an occasionally-binding investment credit limit. Permanent dividend tax reforms distort capital investment decisions in the binding long-run equilibrium, but are neutral otherwise. Temporary unexpected tax cuts stimulate shortterm real activity in the credit-constrained economy, yet produce contractionary macroeconomic outcomes in the slack regime. The occasionally-binding constraint reconciles the `traditional' and `new' views of dividend taxation, and highlights the importance of measuring the firm's initial borrowing position before enacting tax reforms. Finally, permanently lower dividend taxes dampen financial business cycles, and help to explain macroeconomic asymmetries.
    Keywords: Dividend Taxation; Occasionally-Binding Borrowing Constraints; Investment; Business Cycles.; borrowing position; tax relief; dividend distribution; dividend tax rate; dividend tax adjustment; tax environment; benchmark system; dividend tax shock; dividend tax cut; tax adjustment; dividend tax system; Dividend tax; Credit; Corporate income tax; Collateral; Stocks
    Date: 2022–07–01
  6. By: William Craighead (Department of Economics and Geosciences, US Air Force Academy)
    Abstract: This paper examines two types of preference shocks - shocks to the disutility of working and to demand for goods relative to services - in an otherwise standard New Keynesian model. Model-based processes for both shocks are constructed using postwar US data, and both show movements of unprecedented magnitude that coincide with the COVID-19 pandemic. In the model, the relative demand shock leads to opposite movements in inflation and labor between the two sectors, while the shock to labor disutility is stagflationary, with inflation rising and output decreasing. A pandemic-motivated experiment with simultaneous large shocks to both labor disutility and relative goods demand generates divergences between the sectors in inflation and labor, but higher inflation and reduced output overall.
    Keywords: preference shocks, labor supply, relative demand, COVID-19
    JEL: E10 E52
    Date: 2022–08
  7. By: Saroj Bhattarai; Konstantin Kucheryavyy
    Abstract: We present a unified dynamic framework to study the interconnections between international trade and business cycle models. We prove an aggregate equivalence between a competitive, representative firm model that has aggregate production externalities and dynamic trade models that feature monopolistic competition, endogenous entry, and heterogeneous firms. The production externalities in the representative firm model have to be introduced in the intermediate and final good sectors so that the model is isomorphic to dynamic trade models that embody love-of-variety and selection effects. In a quantitative exercise with multiple shocks, we show that to improve the fit of the dynamic trade models with the data, the most important ingredient is negative capital externality in the intermediate good sector. We conclude that this presents a puzzle for the literature as standard dynamic trade models provide micro-foundations for positive capital externality.
    Keywords: international business cycle, dynamic trade models, heterogeneous firms, production externalities, monopolistic competition, export costs, entry costs
    JEL: F12 F41 F44 F32
    Date: 2022
  8. By: Max Ole Liemen; Olaf Posch
    Abstract: In this paper, we revisit the fiscal theory of the price level (FTPL) within the New Keynesian (NK) model. We show in which cases the average maturity of government debt matters for the transmission of policy shocks. The central task of this paper is to shed light on the theoretical predictions of the maturity structure on macro dynamics with an emphasis on model-implied expectations. In particular, we address the transmission channels of monetary and fiscal policy shocks on the interest rate and inflation dynamics. Our results illustrate the role of the maturity of existing debt in the wake of skyrocketing debt-to-GDP ratios and increasing government expenditures. We highlight our results by quantifying the effects of the large-scale US fiscal packages (CARES) and predict a surge in inflation if the deficits are not sufficiently backed by future surpluses.
    Keywords: NK models, FTPL, government debt, maturity structure, CARES
    JEL: E32 E12 C61
    Date: 2022
  9. By: Paolo Cavallino; Boris Hofmann
    Abstract: We lay out a small open economy model incorporating key features of EME economic and financial structure: high exchange rate pass-through to import prices, low pass-through to export prices and shallow domestic financial markets giving rise to occasionally binding leverage constraints. As a consequence of the latter, a sudden stop with large capital outflows can give rise to a financial crisis. In the sudden stop, the central bank faces an intratemporal trade-off as output declines while inflation rises. In normal times, there is an intertemporal trade-off as the risk of a future sudden stop forces the central bank to factor financial stability considerations into its policy conduct. The optimal monetary policy leans against capital flows and domestic leverage. Macroprudential, capital flow management and central bank balance sheet policies can help to mitigate both intra- and intertemporal trade-offs. Fiscal policy also plays a key role. A higher level of public debt and a weaker fiscal policy imply greater leverage and hence greater tail risk for the economy.
    Keywords: capital flows, monetary policy trade-offs, emerging market economies
    JEL: E5 F3 F4
    Date: 2022–07
  10. By: Charles de Beauffort (Economics and Research Department, NBB)
    Abstract: When the government issues long-term bonds, the optimal time-consistent fiscal and monetary policy is to consolidate debt in a liquidity trap by increasing taxes and by taming public spending. This prescription is at odds with large deficit-spending undertaken in the US during previous liquidity trap episodes. In this article, I show that accumulating debt turns optimal with long-term bonds and flexible wages if labor taxes are kept constant or if monetary policy is conducted non optimally. Moreover, even when labor taxes fluctuate and policy is fully coordinated, optimal deficit-spending in a liquidity trap emerges in a medium-scale model with sticky wages and rule-of-thumb consumers. In this case, debt consolidation occurs only after the nominal interest rate has lifted-off the zero lower bound, in accordance with conventional wisdom that a government should fix the roof while the sun is shining.
    Keywords: : Optimal Time-Consistent PolicyDistortionary TaxationLiquidity TrapFiscal and Monetary PolicySticky WagesRule-of-Thumb Consumers.
    JEL: E43 E52 E62 E63
    Date: 2022–07
  11. By: Miss Anke Weber; Rui Mano; Mr. Yannick Timmer; Anastasia Burya
    Abstract: Using the near universe of online vacancy postings in the U.S., we study the interaction between labor market power and monetary policy. We show empirically that labor market power amplifies the labor demand effects of monetary policy, while not disproportionately affecting wage growth. A search and matching model in which firms can attract workers by either offering higher wages or posting more vacancies can rationalize these findings. We also find that vacancy postings that do not require a college degree or technology skills are more responsive to monetary policy, especially when firms have labor market power. Our results help explain the “wageless” recovery after the 2008 financial crisis and the flattening of the wage Phillips curve, especially for the low-skilled, who saw stagnant wages but a robust decline in unemployment.
    Keywords: Labor market power; Monetary Policy; Vacancies; Wages; vacancy posting; wage Phillips curve; technology skill; monetary policy shock; Labor markets; Labor demand; Labor share; Unemployment rate; Global
    Date: 2022–07–01
  12. By: Mr. Natan P. Epstein; Lucyna Gornicka; Karel Musil; Valeriu Nalban; Nga Ha
    Abstract: We present a newly developed Quarterly Projection Model (QPM) for Vietnam. This QPM represents an extended version of the canonical New Keynesian semi-structural model, accounting for Vietnam-specific factors, including a hybrid monetary policy framework. The model incorporates the array of policy instruments, specifically interest rates, indicative nominal credit growth guidance, and exchange rate interventions, that the authorities employ to meet the primary objective of price stability. The calibrated model embeds a theoretically consistent monetary transmission mechanism and demonstrates robust in-sample forecasting accuracy, both of which are important prerequisites for the richer analysis and forecast-based narratives that support a forward-looking monetary policy regime.
    Keywords: Vietnam; Forecasting and Policy Analysis; Quarterly Projection Model; Monetary Policy; Transmission Mechanism; sample forecasting accuracy; impulse response; projection model; monetary policy implementation; forward-looking monetary policy regime; Inflation; Nominal effective exchange rate; Exchange rates; Exchange rate adjustments; Real exchange rates; Global
    Date: 2022–06–24
  13. By: Sebastian Diz; Mario Giarda; Damián Romero
    Abstract: This paper studies wage and price flexibility as a means of absorbing adverse shocks. We focus on economies with unequal access to financial markets and where the monetary authority is constrained by the zero lower bound. We show that the economy becomes more volatile in this setting when wages are more flexible. As our model assumes financial frictions, wage flexibility translates into output volatility via a redistribution channel, which operates through aggregate demand. We find that this volatility depends on the relative wage and price rigidity. Additionally, we show that the redistribution channel gains prominence when the central bank is at the zero lower bound. We conclude that in these kinds of economies, the usual recommendation of making labor markets more flexible to restore high output levels, is mistaken.
    Date: 2021–10
  14. By: Gustavo González
    Abstract: I investigate the importance of commodity price shocks on aggregate productivity dynamics. I focus on variable utilization of primary factors as driving mechanism. I exploit variation in product tradability and cost exposure to the copper industry to characterize the responses of manufacturing Chilean firms to copper price shocks. I find that, when copper prices increase, establishments selling non-tradables display higher productivity growth than those selling tradables. At the same time, plants more cost-exposed to the copper industry display lower growth. I develop a multi-sector small open economy model featuring frictions to factor management and variable factor utilization. I quantitatively find that variable utilization can generate a strong positive association between copper price shocks and measured aggregate productivity, as it is observed in Chilean data.
    Date: 2022–01
  15. By: Farzana Alamgir; Alok Johri
    Abstract: We find that national poverty head-count ratios and country default risk (measured as sovereign bond spreads) are positively correlated. For example, a nation with 40 percent of the population below the poverty line faces an average spread that is 120 basis points higher than a nation with 10 percent of extremely poor households. This correlation is robust to the inclusion of a number of country specific variables including the country’s Gini coefficient and its per capita GDP. We build a sovereign default model that can help explain this correlation that incorporates two types of households – those earning average income and those at the poverty line. The government runs a social safety net which taxes the average income household in order to transfer consumption to the poor. A political constraint that ensures that all households wish to participate in the safety net program constrains the fiscal choices of the government. The novel aspects of the model are calibrated using South African data on household income dynamics, its poverty line and aggregate social transfer rate while the usual calibration targets in the literature are also deployed. A variant of this benchmark economy with a more poor households displays higher default risk than the benchmark economy. The interaction of international borrowing terms with the social safety net and with the political constraint account for this result. Defaults occur when too large a fraction of taxes will be needed for debt repayment and this occurs more often in economies with a larger proportion of the poor. We show that the correlation between the proportion of poor and level of spreads survives even after controlling for the increase in inequality implied by increasing the proportion of poor households. This is achieved by simultaneously increasing the income of the poor. We show that the worse borrowing terms faced by the benchmark economy with higher poverty come with welfare losses due to the lower debt that it can afford and that it would default much less frequently if it faced the same terms as the low-poverty economy.
    Keywords: sovereign default; country spreads; poverty rates
    JEL: F34 F41 G15 H63
    Date: 2022–08
  16. By: Andrew Atkeson; Jonathan Heathcote; Fabrizio Perri
    Abstract: The US net foreign asset position has deteriorated sharply since 2007 and is currently negative 65 percent of US GDP. This deterioration primarily reflects changes in the relative values of large gross international equity positions, as opposed to net new borrowing. In particular, a sharp increase in equity prices that has been US-specific has inflated the value of US foreign liabilities. We develop an international macro finance model to interpret these trends, and we argue that the rise in equity prices in the United States likely reflects rising profitability of domestic firms rather than a substantial accumulation of unmeasured capital by those firms. Under that interpretation, the revaluation effects that have driven down the US net foreign asset position are associated with large, unanticipated transfers of US output to foreign investors.
    Keywords: Global imbalances; Current account; Equity markets
    JEL: F30 F40
    Date: 2022–04–25
  17. By: Paul Bergin; Kyunghun Kim; Ju H. Pyun
    Abstract: This paper finds that limited exchange rate flexibility in the form of “fear of appreciation” significantly slows adjustment of current account imbalances, providing novel support for Friedman’s conjecture regarding exchange-rate flexibility. We present a new stylized fact: floaters have faster convergence than peggers for current account deficits, but not so for surpluses. A striking implication is that current account surpluses are more persistent than deficits on average. We provide evidence that this asymmetry is associated with a one-sided muting of exchange rate appreciations. We develop a multi-country DSGE model augmented with an asymmetric exchange rate policy to represent fear of appreciation; when solved to a third-order approximation, it can explain greater persistence of current account surpluses compared to deficits.
    JEL: F31 F33 F44
    Date: 2022–07
  18. By: Erik Hurst; Patrick J. Kehoe; Elena Pastorino; Thomas Winberry
    Abstract: We develop a framework with rich worker heterogeneity, firm monopsony power, and putty-clay technology to study the distributional impact of the minimum wage in the short and long run. Our production technology is disciplined to be consistent with the small estimated employment effects of the minimum wage in the short run and the large estimated elasticities of substitution across inputs in the long run. We find that in the short run, a large increase in the minimum wage has a small effect on employment and therefore increases the labor income of the workers who were earning less than the new minimum wage. In the long run, however, the minimum wage has perverse distributional implications in that it reduces the employment, income, and welfare of precisely the low-income workers it is meant to help. Nonetheless, these long-run effects take time to fully materialize because firms slowly adjust their mix of inputs. Existing transfer programs, such as the earned income tax credit (EITC), are more effective at improving long-run outcomes for workers at the low end of the wage distribution. But combining existing programs with a modest increase in the minimum wage generates even larger welfare gains for low-earning workers.
    Keywords: Employment; Earned income tax credit; Progressive tax and transfer system; Monopsony; Putty-clay capital; Inequality; Unemployment; Labor market participation; Labor income; Redistribution; Monopsonistic competition; Wages; Search frictions
    JEL: E24 J64 E62 J22 J23 J31 D33 J69
    Date: 2022–07–14

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